The Writedown Hype

THE WRITEDOWN HYPE…. Opponents of health care reform threw every argument they could think of to derail the initiative, but the Affordable Care Act passed anyway. But the right isn’t quite finished coming up with new criticisms. The latest, pushed aggressively in recent weeks by the far-right editorial board of the Wall Street Journal, has to do with the corporate “writedown” problem. The NYT has a good editorial on this today.

Republican critics are continuing to pummel health care reform. Their newest charge is that the elimination of one generous tax deduction for retiree benefits would take such a bite out of corporate profits that companies may have to cut back on hiring, drop that retiree benefit, and shift added costs onto the taxpayer.

What is really going on? It is true that, starting in 2013, the new law eliminates a corporate tax advantage on retiree drug benefits that amounts to double-dipping.

It is also true that accounting rules require that the present value of the entire additional tax that companies will have to pay over the next several decades be put on the books now. That led AT&T to declare a charge of about $1 billion in the first quarter of 2010 and Verizon to declare $970 million.

Those look like staggering amounts until one understands that they don’t require any immediate cash payments and that the added taxes will be paid out slowly — over perhaps 30, 40 or more years, depending on a company’s retiree plan.

It’s the key reason this argument hasn’t really gone anywhere, and Wall Street didn’t care about the corporate announcements — the impact is so negligible, no one outside the Wall Street Journal‘s editorial board really cared. Even Republican lawmakers haven’t bothered to push this with any enthusiasm.

With the same companies affected by the change already profiting from subsidies in the Medicare Part D law, corporations are hardly in a position to complain.

The new health care reform law has left the 28 percent subsidy intact and continued to exempt it from taxation. But companies will no longer be allowed to deduct the subsidy as if it were an expenditure of their own.

That seems a reasonable way to generate a bit more revenue to pay for covering the uninsured. It also treats all employers equally instead of favoring profit-making firms with a special deduction that is of no value to nonprofit organizations, state and local governments, or firms that lose money.

The Obama administration has also been pushing back against this, as evidenced by Commerce Secretary Gary Locke’s op-ed last week: “Don’t Believe the Writedown Hype.”

But the bottom line (so to speak) remains the same. Kevin Drum had a good piece on this last week: “[I]t turns out that corporations who qualify for this sweetheart deal accounted for it as a future addition to their earnings stream. Now the stream is gone — after 2013, anyway — so they have to reverse that accounting charge. It’s very sad. Still, there’s no actual money involved. No one has to write a check to anyone else. Corporations just have to add a footnote to their next quarterly report saying that the government has come to its senses and will no longer allow them to write off an expense that the government is paying for in the first place.”